Download presentation

Comments on
Introducing MTEF in Korea
Youngsun Koh
March 15, 2004
Korea Development Institute

Why do we need MTEF?

What should we decide on before
proceeding?

Why do we need MTEF?
(1) To moderate the trend growth in government
spending
(2) To strengthen the planning capacity of line
ministries
(3) To facilitate the working of the automatic
stabilizer
(1) To moderate the trend growth in spending

Government spending has been growing quite rapidly.
Consolidated Central Government Spending
(% of GDP)
26
Financial-sector restructuring
24
Social insurance programs
22
Local shared taxes
20
18
Interest expenses
Local transfer fund
16
14
12
10
Discretionary spending
8
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Note : The figures for 2004 are based on budget estimates.
(1) To moderate the trend growth in spending

The small size of total spending is mainly due to the
immaturity of the pension system.
General Government Expenditure
(% of GDP)
50
Transfer
Interest payment
40
30
20
Subsidies
Investment
10
Consumption
0
Korea
U.S
Japan
Others
Germany
France
-10
Note : The data for Korea and Japan refer to 2000. Others refer to 2001.
Source : OECD.
U.K.
Canada
(1) To moderate the trend growth in spending

We can observe a slippage in fiscal discipline as indicated
by frequent introduction of supplementary budgets.
Number of Supplementary Budgets
3
2
1
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
Source : MPB.
(1) To moderate the trend growth in spending

MTEF will enable us to moderate the trend growth in
spending by imposing a global ceiling on medium-term
expenditures.

It will also contribute to strengthened fiscal discipline by
making clear to the public any deviation from the target
levels of spending, deficit, and debt that is due to
supplementary budgets.
(2) To strengthen line ministries’ planning capacity

Planning capacities are generally weak in line ministries.

Annual budget requests are unrealistically large.
Initial Budget Requests and Final Budget Amounts
(% increase on previous years’ actual budget amounts)
1997
1998
1999
2000
2001
2002
Initial budget requests
36.0
24.3
37.0
33.2
36.9
37.0
Final budget amounts
16.9
3.8
14.5
7.7
9.4
12.2
Note : Refers to the General Account budget.
Source : MPB.

Part of the reason can be found in the uncertainty
surrounding the resource availability in the future.
(2) To strengthen line ministries’ planning capacity

Such weak planning capacity can seriously damage the
efficient utilization of scarce resources.

MTEF will reduce uncertainty, enhance predictability, and
help line ministries to build their planning capacity.
(3) To facilitate the working of the automatic stabilizer

An important principle in fiscal management has been
“expenditure within revenue” for each year.

This practice has the potential to induce a pro-cyclical
behavior in spending.
Surplus
Revenue
Expenditure
(3) To facilitate the working of the automatic stabilizer

In MTEF, “balance” is pursued not for each year but over
the business cycle, letting the automatic stabilizer work in
full to dampen the cyclical fluctuation in the economy.

What should we decide on before
proceeding?
(1) Medium-term targets for deficit and debt
(2) Coverage of the global ceiling on spending
(3) Escape clause for ceilings
(1) Medium-term targets for deficit and debt

In the U.K., two fiscal rules guide the medium-term
expenditure management of the public sector:
 The golden rule: On average over the business cycle, the current
budget is in balance or surplus.
 The sustainable investment rule: Net debt as a proportion to GDP
will held stable over the business cycle at a prudent level. The
current target is to keep the net debt at below 40 percent of GDP.

In Sweden, the government aims to maintain the
structural surplus of the general government at 2 percent
of GDP.
(1) Medium-term targets for deficit and debt

In Korea, an appropriate medium-term target would be
maintaining the consolidated central government in
balance over the business cycle.

In computing the balance, we would exclude;
 surpluses in the National Pension Fund (and possibly in other social
insurance funds as well); and
 the temporary expenditure to transform the KDIC bonds into treasury
bonds as scheduled in 2003 through 2006.

In this case, the debt-to-GDP ratio is expected to stabilize
at around 25 percent.
(2) Coverage of the global ceiling on spending

Once the medium-term targets for deficit and debt are
determined, they are operationalized through the global
ceiling on spending.

In other countries, ceilings are usually imposed on those
parts of the spending that can be actually controlled in
the annual budget process.
 In the U.S., under the Budget Enforcement Act, caps were placed on
“discretionary” spending, which excludes, among others, social
security and interest payments.
 In Sweden, all spending except interest payments is subject to the
global ceiling.
(2) Coverage of the global ceiling on spending

An extended coverage of the ceiling would impose strong
fiscal discipline on line ministries, especially in relation to
welfare expenditures.
 But it can disrupt annual budget process when, for example, an
unexpected large increase in pension benefits necessitates a cut-back
in other welfare expenditures.

A limited coverage will add to the tranquility in budget
process.
 But it is prone to unforeseen upsurges in total spending when the
forecasts of “mandatory” spending are biased downward.
(2) Coverage of the global ceiling on spending

In Korea, I would define “mandatory spending” as
comprising the expenditures on financial-sector
restructuring, social insurance programs, local shared taxes,
local transfer funds, and interest expenses.
 Other spending would be designated as “discretionary.”

The global ceiling would be imposed on the discretionary
spending.
 At the same time, efforts would be made to build a reliable model to
forecast mandatory spending (in particular, the pension-related
spending).
(3) Escape clause for ceilings

In Sweden, no breaching is allowed of global ceiling. But
too much rigidity can topple the whole framework unless
backed up by a strong support from the general public and
the political circle.

A clear and transparent escape clause would be a better
choice than an outright ban of the breaching of global
ceiling.
 We need to hammer out the details of the escape clause in the
ensuing discussions on MTEF.